Lecture 17

Lecture 17 - Announcements HW due tonight Next week's HW...

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Announcements HW due tonight! Next week’s HW due on Weds too. Those who can skip will get an e-mail on Thursday (can also check the spreadsheet on BB) No class Friday. 1 of 33

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Long Run Costs Before talking about how a firm will behave in the “short run,” let’s jump to the “long run” just for a minute. In the long run all costs are variable and the firm can change anything it wants. In the long run, the goal is to find the absolute lowest cost way to produce the good in question. 2 of 31
3 of 36 LONG-RUN COSTS: ECONOMIES AND DISECONOMIES OF SCALE long-run average cost curve ( LRAC ) A curve that indicates the lowest average cost of production at each rate of output when the size or “scale” of the firm is allowed to vary. Every possible short-run AC curve is tangent to the LRAC, those tangency points represent the lowest- cost way to produce each level of output. The LRAC is somewhat like a PPF in that it’s a “planning curve”. The region below the curve unattainable, and the region above the curve is inefficient. LRAC answers the question: “Given a level of output, what is the lowest long run cost at which I can produce?”

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Short-run ATC curves form the LRAC curve 4 Cost per unit 0 q q a q’ Output per period q b S S’ M M’ L L’ SS’, MM’, LL’ are short run ATC curves Long run ATC curve: SabL’ a b The LRAC curve
ATC 1 ATC 2 Many short-run ATC curves form firm’s LRAC curve 5 0 q q’ Output per period Many possible plant sizes Cost per unit \$11 10 9 b ATC 3 ATC 4 ATC 5 ATC 6 ATC 7 ATC 8 ATC 9 ATC 10 Long-run average cost c a Each short-run curve is tangent to the long run average cost curve Each point of tangency represents the least cost way of producing that level of output

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6 of 36 LONG-RUN COSTS: ECONOMIES AND DISECONOMIES OF SCALE increasing returns to scale, or economies of scale An increase in a firm’s scale of production leads to lower costs per unit produced. constant returns to scale An increase in a firm’s scale of production has no effect on costs per unit produced. decreasing returns to scale, or diseconomies of scale An increase in a firm’s scale of production leads to higher costs per unit produced.
LRAC 7 of 33

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Long Run Minimum Efficient Scale (MES) – This is the lowest point on the LRAC. It is also known as the optimum plant size (where production occurs at the lowest possible cost), and varies for each firm/industry.
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This note was uploaded on 06/21/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 17 - Announcements HW due tonight Next week's HW...

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